What is a solar power purchase agreement?

Power purchase agreements (PPAs) can be a great tool for financing solar projects, especially in the commercial market. Here, we’ve reshared a blog from SunPower to explain some PPA basics.

A solar PPA is one of several ways businesses and public entities can pay for solar. Organizations should weigh the pros and cons of solar PPAs carefully against their needs and priorities before deciding if a PPA is right for them. Then they should evaluate several PPA providers to ensure they find one that will be an excellent energy partner for decades to come.

What is a solar PPA?
A PPA is a financing arrangement that allows businesses, government agencies and educational institutions to purchase solar electricity with no upfront capital cost. You buy the energy, not the solar equipment. It’s a great way to get the benefits of solar without having to take on the responsibilities of being a solar system owner-operator.

A third-party PPA provider pays for the cost of a solar installation on or near the customer’s facilities (like a rooftop, parking lot or unused land). The provider takes responsibility for ownership, operation and solar panel maintenance. The customer simply enters into an agreement to purchase the electricity produced by the system at a predetermined rate per kilowatt-hour (kWh), the same unit of measurement as their standard utility bill.

A typical PPA agreement might run 20 to 30 years and may include a variety of purchase and renewal options. A Pre-paid PPA (PPPA) with a large percentage of the PPA payments provided at the beginning of the agreement is another variation of this funding method.

What are the pros and cons of solar PPAs?
There are benefits and drawbacks to solar PPAs. Weigh the pros and cons against a customer’s priorities before deciding if a solar PPA is right for them.

Pros of Solar Power Purchase Agreements

$0 capital investment: There’s usually no upfront cost involved in entering into a solar PPA.

No production or performance risks: Once a commercial solar system is up and running, there is always the possibility of issues arising that may cause downtime—such as severe weather damage to the solar array or a transmission outage. With a PPA (unlike an operating lease), if the system doesn’t produce energy, the customer doesn’t have to pay.

No ongoing operations and maintenance (O&M) costs: A third party pays for the O&M of the solar system.

Off-balance-sheet obligation: A solar PPA isn’t looked at as debt. It functions just like a regular utility bill, so it doesn’t tie up capital the customer could use for other investments.

Early buyout option: Most PPAs include a buyout option that would allow buying the solar system before the end of the PPA term—usually at the end of year six or seven, as specified in the PPA contract.

Corporate sustainability: By purchasing clean, renewable energy instead of using energy generated with fossil fuels, organizations can make a real difference for the environment and help set an example for sustainable business practices.

Cons of Solar PPAs

Cash is cheaper: In the long term, the customer will pay less and save more buying their own solar system with a cash purchase or capital improvement loan than with a PPA.

A lease may make more sense: Depending on an organization’s particular situation, a solar operating lease may make more sense than a PPA. Solar leases have a lower cost of capital because the owner of the lease doesn’t take on performance risks like a PPA provider does. But because leases have shorter terms, periodic payments would be higher than a PPA. At the end of the lease term, the customer usually has the option to purchase the solar system they’ve been leasing for a reduced price. In contrast, if the customer has the option to buy the solar hardware in their PPA, it’s usually priced at the higher of Fair Market Value or Termination Value (probably more expensive than at the end of a lease).

Longer-term obligation: The previously mentioned early buyout option notwithstanding, with a PPA, the customer is generally agreeing to purchase power for 20 or more years (as opposed to a typical solar operating lease of seven to 10 years—or an outright purchase).

No control of equipment: With a solar PPA, the customer doesn’t own the solar equipment, and doesn’t maintain it, so they’re relying on someone else to choose quality equipment and keep it performing at peak efficiency.

What should you look for in a solar PPA provider?
As with any important long-term decision, you should assess multiple PPA providers before signing any agreement. Ideally, you’ll want to look for a PPA provider who:

Does development and installation, using high-quality solar equipment and experienced project leadership and staff

Has demonstrated longevity and will be around in 20-30 years to honor and maintain the PPA for its entire duration

Doesn’t just push PPAs but guides you honestly to the right solution for your organization—which may be a PPA, a lease, a cash purchase, or another financial solution

Seeks out all possible federal, state and local tax incentives and passes the savings on to you in a lower PPA rate

At the end of the PPA will remove the system at no cost to you, will negotiate a new rate, or will let you buy the system at fair market value

What pitfalls should you avoid in the PPA process?
Look out for PPA providers who subcontract or farm out parts of the PPA arrangement (which typically includes financing, construction, O&M and asset management) to sub-par contractors, financiers and/or O&M providers—or companies that expect customers to negotiate each piece separately on their own. The process will go much more quickly and smoothly and have a far better outcome if customers work with one company that does it all and/or vets its partners carefully on their behalf.

Organizations should also inquire about what solar technology will be used for their installation. If their PPA provider uses inferior solar technology or substandard O&M, they may experience significant system downtime or a sharp drop in performance over time. Though organizations won’t have to pay when the system isn’t producing, they’ll be forced to buy energy from the grid at a higher rate to make up for it.